The massive wave of consolidation that reshaped the media and entertainment sector in 2018 has crested, leaving companies to “muddle through” an extended period until a willing seller materializes.
That was one of the more provocative conclusions of a quartet of analysts on the NATPE panel “How Wall Street Watches Television,” which was moderated by Lionsgate investor relations head James Marsh.
“You need a motivated seller,” observed Michael Nathanson of MoffettNathanson, citing the desire to cash out on the part of Time Warner and the families controlling Fox and Scripps Networks Interactive. “I think we’re in the last age of general consolidation, of big changes.” Apart from CBS and Viacom, which Nathanson predicts will finally re-tie the knot this year, “We’re in this holding pattern for a while.”
Alexia Quadrani of J.P. Morgan agreed, saying she expects most companies to “muddle through” 2019 without stepping up to make game-changing deals.
Amy Yong of Macquarie Research cited the less-than-encouraging results for the stocks of merging companies in recent months, specifically Comcast, which shelled out $40 billion for Sky, and AT&T, which finally reeled in Time Warner for $81 million.
“None of the stocks has reacted very positively,” she noted, which has gotten the attention of all top decision-makers. “For better or worse, these management teams still care about their equity and their perception among investors.” She added that her message to those companies would be, “Wall Street is telling you that M&A may not be the right track.”
While he didn’t jump in to disagree, Steven Cahall of RBC Capital Markets opened the panel by predicting that there would be “four major, direct-to-consumer platforms” a few years from now: Netflix, Amazon, Disney and Apple. “If you don’t work for one of those companies,” he said. “The thing for you to do is to figure out how you fit into a world where they become more and more dominant.”
Tech giants, he said, drove a roughly 20% year-over-year increase in overall industry video content spending, which Cahall’s team at RBC estimated to reach $107 billion in 2018. With digital players determined to spend heavily, he added, “everyone now has to skate to that puck.”
Quadrani pushed back somewhat on Cahall’s dramatic forecast. “There’s a lot of room for niche players as well,” she said, “especially because for many of them going direct to the consumer does not bring any extra cost.” While the vast array of streaming services will shrink a bit in the coming years, “you will see more than a handful of these niche players.”
One existential threat looming over all traditional players elicited some interesting discussion — and disagreement — toward the end of the session. The decision by WarnerMedia, Disney and NBCUniversal to jump into streaming with varied approaches has once again surfaced the dilemma about whether traditional companies should sell content to streaming giants or preserve rights for their own direct-to-consumer platforms. One recent case in point was a non-exclusive extension to the rights to Friends, for which WarnerMedia got $100 million from Netflix for a one-year renewal just weeks after putting a stake in the subscription streaming ground.
“Some years back, investors got very worried about the idea of media companies selling all of their content to digital platforms creating their own demise,” Cahall said. “Now, we’ve come full circle and every company’s saying, ‘We’re not going to do that anymore. We’re going to have our own direct-to-consumer business.’ I think investors have gotten smart to that and said, ‘Well, what is the business case? Are you going to generate a higher return investing in your own platform as opposed to just selling it to someone else?’ …. Simply [keeping things in house] because everyone is doing it isn’t enough anymore.”
Nathanson responded that he gives “no credit” to companies caving into the temptation to take a large streaming payouts for content. “Don’t sell your content to your competitor — that’s just a basic rule if you want to have a long-term business,” he said. “Why take a check for $100 million if you’re a massive company? Why aren’t Friends and Seinfeld on HBO on demand? … Some companies need to wake up quickly.”
Quadrani, citing a series of forecasts and strategic decisions by CBS in recent years as it navigated the rise of the great frenemy, Netflix, said “it’s easier said than done, to step away for $100 million for Friends and then have earnings come down. … When you’re a public company, you want to show growth.”